New takeovers policy proposals from ASIC are more akin to spring-cleaning than a total makeover.
ASIC's recently-released suite of draft regulatory guides for takeovers is a combination of:
- updating some very old policies;
- some policy tweaks;
- regularising of existing de facto policy; and
- recognition of Takeovers Panel policy.
Most of this is welcome and long overdue, particularly where ASIC is for the first time reducing to writing policy that it has been applying for a long time. There are several aspects which may cause concern, but overall these new regulatory guides will assist in the efficient conduct of M&A transactions. The changes of real significance for the M&A market are yet to come: Treasury's consideration of various takeover reforms, and an update to ASIC's Truth in Takeovers policy, which has not been revised for over 10 years.
The main points are outlined below.
Substantial holding notices
Apart from a detailed guide on how to complete substantial holding notices, the proposed new policy includes a warning against trying to avoid disclosure by entering into broad heads of agreement:
"RG 000.286 Where multiple agreements contribute to the situation, a copy of all agreements must accompany the notice. Substantial holders cannot avoid their obligation to disclose full or substantive details of all contributing agreements and arrangements by, for example:
(a) entering into a preliminary agreement or understanding incorporating limited terms (which triggers the substantial holding requirement); and then
(b) omitting substantive details of the overall transaction on the basis that a formal or collateral written agreement or arrangement containing these details was (or will be) finalised at a later time after the immediate substantial holding disclosure requirement arising in relation to the transaction has been discharged.
RG 000.287 When a preliminary step or agreement gives rise to a change in voting power before other agreements contributing to the overall situation have been finalised, the substantial holding notice must still be accompanied by a statement setting out full and accurate details of other agreements or arrangements that have been negotiated: s671B(4)(b). As noted in Austar United Communications Limited  ATP 16 at , a failure to provide details of surrounding agreements or arrangements may also give rise to unacceptable circumstances, having regard to the efficient, competitive and informed market, principle set out in s602(a)."
The Corporations Act allows a person to go above 20% of a company without making a bid in certain limited circumstances. Three of those exceptions are the subject of the new policy:
Creep. ASIC proposes that any relief for involuntary dilution will only be given where the applicant has been diluted to below 19.1%;
PAITREOS. ASIC wants to extend the accelerated rights issue exemption (CO 09/459) to PAITREOS;
Underwriting. Not unexpectedly, the new policy includes an increased emphasis on the unacceptable use of the underwriting exemptions to change the control of a company. It also:
- removes the existing policy/comment on pre-lodgement underwriting (on the basis that "the relevant exceptions do not generally apply to arrangements where securities are offered to holders prior to the relevant rights issue or public offer");
- indicates that arrangements that depend on sub-underwriting (where default by a sub-underwriter relieves the underwriter of its obligations), or are subject to termination events within the underwriter’s control are not considered "underwriting".
This last point reflects an emerging ASIC concern about underwriting in general. We understand that the regulator is looking closely at underwriting arrangements which give the underwriter too much freedom to walk away from its obligations.
Although it does not appear to be a major issue at the moment, the new policy addresses "Goldlinking". This is the practice of splitting shareholdings into small unmarketable parcels in order to artificially increase the number of shares that the holder can obtain in a proportional scrip bid.
Under its proposed policy, ASIC will prevent split parcels of shares being tipped into proportional bids if the split takes place after "after the bid is publicly proposed".
It can sometimes be very difficult to determine whether a side-deal between a bidder and a target shareholder has resulted in the target shareholder's receiving a prohibited collateral benefit.
The Takeovers Panel went through a detailed consultation process when drafting a Guidance Note on the subject, and the end result didn't really advance beyond guidance that had previously been given. That hasn't stopped ASIC having its own shot at the issue:
"Our draft guidance is focused on the test introduced by the CLERP Act that the benefit must be ‘likely to induce’ the recipient or an associate to accept the bid or dispose of target securities. Our draft guidance reflects the ‘balance of factors’ approach we take when considering the likely effect of a benefit that is offered to some but not all target holders. The ‘balance of factors’ approach to the test of inducement is wider than the ‘net benefits’ test."
In line with this, the proposed new RG includes a lengthy ASIC interpretation of what constitutes a collateral benefit (paras 000.195 - 000.212 of the draft Regulatory Guide Takeover Bids).
Interestingly, ASIC also indicates that it will also apply this new policy when deciding whether or not to object to a takeover via scheme of arrangement. It is unclear whether this represents a revival of ASIC's old dislike of takeovers via schemes. More likely, it is simply the reduction to writing of ASIC's current practice of negotiating changes to schemes before they are formally put to shareholders (as reportedly happened, for example, in the Whitehaven-Aston Resources merger.
On one reading, the Corporations Act does not actually require a bidder to have funding in place before launching a bid, as long as that is disclosed to the target shareholders. However a number of Panel decisions have highlighted that a bidder in that position may be acting "recklessly" (breaching section 631) or unacceptably (allowing the Panel to impose sanctions) if it does not have funding in place, or at least a reasonable expectation of being able to obtain funding.
ASIC's new policy on funding continues and fleshes out its existing policy of requiring extensive disclosure of the bidder's funding arrangements. However, it also picks up and expands upon the Panel's insistence that bidders should have a reasonable expectation that they will have sufficient funds to pay for acceptances.
Closing time for an automatically-extended bid
ASIC proposes to modify section 624(2) so that, where an offer is automatically extended, it ends at the time of day it would have ended but for the extension (rather than at midnight on the 14th day of the extended period).
ASIC wants to overcome the effect of Australian Pipeline Limited v Alinta Limited  FCAFC 55, by providing that an offer is accepted when a target holder gives the bidder an acceptance form containing a written instruction or authority accepting the offer for bid class securities registered in a clearing and settlement facility (eg. CHESS).
The new policy proposals formally recognise the role played by acceptance facilities in modern bids:
- ASIC proposes a Class Order to the effect that acceptance into an acceptance facility does not give the bidder a relevant interest. In the case of institutional acceptance facilities, this relief will only apply if the facility is only open to institutions which are actually restricted by their investment mandate from accepting a conditional bid - a very narrow class.
- consistent with its practice to date, ASIC will also grant case-by-case relief to the effect that, for the purposes of section 624(2)(b), a bidder is taken to have voting power in securities that are the subject of the facility as soon as it gives the notice triggering the release of the acceptances and instructions by the facility agent. This is designed to overcome possible delays in processing of release instructions by custodians.
The effect of the proposal will essentially result in acceptance facilities (where they are used) being extended to all shareholders (rather than a narrow class of institutions), as was the case in the bids this year for Thakral and Alesco.
Two changes are proposed in relation to joint bids (ie. situations in which joint bidders together control more than 20% of the target before the bid has even begun). These largely reflect existing ASIC practice:
- ASIC will formally drop the "match or accept any higher bid" requirement where one of two joint bidders starts off with less than 3% (this largely reflects existing ASIC practice);
- ASIC will extend its joint bid policy to schemes.
In formally extending the policy to schemes for the first time, ASIC has imposed some new conditions which have not been part of its current practice. ASIC will allow joint bidders to aggregate their existing holdings provided that they don't vote in the same class meeting as other target shareholders. However, ASIC also proposes that joint bidders and their associates should not vote against a higher rival scheme even though the rival scheme will not be unconditional at the time of the vote. Although this is not likely to be an everyday situation, this requirement may give rise to some difficult timing issues for competing bidders who choose to structure their transaction by scheme of arrangement.
No major changes are proposed for compulsory acquisitions after a successful bid. Rather, ASIC proposes simply to address a handful of wrinkles in the legislation:
- in applying the 90% test, only relevant interests that the bidder or associate has through section 608(3)(a) will be excluded (removing any ambiguity about whether section 608(3)(b) deemed relevant interests are also excluded);
- if the bidder has given a compulsory acquisition notice following a takeover bid under section 661B, the bidder will not have to make buyout offers to remaining holders in accordance with sections 662B and 662C;
- ASIC will provide compulsory acquisition notices that do not differ between shareholders (eg. they won't contain names and addresses) – this will mean that bidders will no longer be faced with the choice between lodging copies of the notices sent to every shareholder or applying to ASIC to lodge only a pro forma (or just winging it, and lodging a pro forma anyway).